Trading Tips For Moneymakers

lock in your profits

Speculation is a business and you need to develop a "business plan." The most important factor to realize before speculating in the stock market is that you must establish a trading plan and not deviate from it.

Gluttony is the cause of deviation. If you are able to stay focused and follow your trading plan, then you will be a successful speculator (as long as your plan is successful). Here are two basic rules that will help you lock in a profit:

Rule 1Learn to accept many small losses. Money cannot consistently be made trading every day, week, or month of the year. Whenever you trade into a losing position, take the loss and get out. Never add to a losing position, as it simply means you were wrong. Wishful thinking must be eliminated at all costs.

Rule 2Lock in your profits. Once you realize a capital gain and observe the stock price has lost some of its steam or reached its daily top, then it's time to sell. But what happens if you feel the stock might continue to rise, like in the aforementioned example?

Remember, bears and bulls make money. So how can you put yourself in a position where you can benefit from an upward or downward movement? Well you can take quite a few positions, ranging from trading options and spreads, to placing limit orders.

But if you're not the sophisticated speculator and prefer to keep things simple, here is a simple rule of thumb that will guarantee your paper profits.

always take half

Whenever you realize a capital gain, you can lock in half of your paper profits by selling half of your position and keeping the other half to ride the wave of a potential upward movement. Don't forget to place a limit sell order with the remaining position in order to protect your profit.

If the upward wave materializes, follow the same procedure: sell half of your position and keep the remainder for another potential wave.

Why would you want to follow such a strategy? Because you don't want to be in a position where you buy a share for $4, have it rise to $8 (100% gain) before dropping back to $3, without selling it.

You also don't want to be in a position where you sell the stock at $8, only to see it jump to $50 the following day. Remember to protect yourself from jigsaw movements, take half the profit from quick windfall gains and ride the wave with the remaining position.

The last thing you want is to make $20,000 one week and lose the same amount the next. By following this strategy you will consistently be assured to make small gains that will inflate over time. Remember, a bird in the hand is better than two in the bush.

Please note that this strategy is best suited for the short-term speculator. You should never speculate with investment money. If you invest for the long-term, then this strategy is not intended for you.